Step one: prove someone will pay
Before you spend money, test whether real customers will buy at a price that leaves profit. A few paid sales teach more than a long plan.
Describe your offer in one sentence, including who it is for and what it costs. Then try to sell it to five to ten people who match that description. Ask for money, a deposit or a signed commitment, not just compliments.
Questions to answer:
- Who exactly is the customer and where do they look for this?
- What do they pay now for similar solutions?
- What would make them switch?
- What does it cost you to deliver one unit or hour?
If sales are slow, change the offer before you build more. See commonly asked questions about starting a business for other early checks.
Step two: write a short plan with real numbers
A plan for most small businesses can be a few pages: offer, customers, how you will reach them, costs, pricing and a cash forecast for the first year.
A plan does not need to be fancy. Focus on four parts:
- Offer and customer. What you sell and who buys.
- Marketing. The two or three ways you will find customers and what each costs.
- Operations. Tools, suppliers, space, people and licenses.
- Money. Startup costs, monthly costs, prices and expected sales.
Create a month-by-month cash forecast for the first twelve months with a conservative sales line. If the forecast shows you running out of cash in month five, adjust before you start. For a loan application you will need more detail, as covered in writing a business plan for a loan.
Step three: choose a structure and register
Most owners choose a sole proprietorship, LLC or corporation. The choice affects liability, taxes and paperwork, so compare options with an accountant or attorney.
A sole proprietorship is the simplest but offers no separation between you and the business. An LLC is common because it can limit personal liability with modest paperwork. Corporations bring more formality and tax choices.
Registration usually includes:
- Registering the business name or a DBA
- Forming the entity with your state, if applicable
- Getting an EIN from the IRS
- State and local business licenses and sales tax permits
- Industry-specific permits
Read how to choose a business entity and what an LLC is. Requirements change by state, so check your state's business agency.
Step four: set up money the right way
Open a business bank account, keep personal spending separate, track every expense and choose bookkeeping software from the start. This protects you at tax time and when you seek financing.
Mixed finances are a common source of trouble. Open a business checking account, get a business card if you qualify and route every business transaction through them.
Set up the basics:
- Bookkeeping software or a bookkeeper
- A monthly routine to reconcile accounts
- A separate savings account for taxes
- A system for saving receipts
See separating business and personal finances and how to track business expenses. If you need more guidance, our financial steps for starting a business goes deeper.
Step five: price for profit
Your price must cover direct costs, a share of overhead, taxes and profit. Pricing only to match competitors can leave you with no margin.
Illustrative example: you sell a service for $100 an hour. Direct labor and supplies cost $35. Overhead, such as software, insurance and marketing, adds $20 per billable hour. Taxes and owner pay take another $25, leaving $20 in profit. If a competitor charges $75 and you match them, profit disappears.
Calculate your break-even point: fixed monthly costs divided by profit per sale. That number tells you how much you must sell to stay afloat. Then compare your margin with norms in what a good profit margin looks like.
Step six: plan the first year of cash
Most businesses lose cash before they make it. Plan for startup costs plus several months of expenses, because sales usually build slower than costs.
Add up one-time costs such as equipment, licenses, branding and initial inventory. Then add at least three to six months of operating costs. If that total is more than you can fund, shrink the launch: fewer products, a smaller space, or start part time.
Common sources are savings, family, grants for specific groups, microloans, crowdfunding and SBA programs. Read money to start a business and bootstrapping a startup to compare. Avoid personal guarantees you cannot afford and be wary of anyone promising guaranteed funding.
Step seven: grow with cash flow in mind
Once sales are steady, financing can speed growth if you know what the money will produce. ROI Funder works with businesses past the startup stage.
After six months of operation and consistent sales, you may be ready to borrow for something that pays back. ROI Funder considers businesses with 6+ months in business, $20,000+ monthly revenue and 500+ FICO. Brand-new startups generally need other sources first.
Illustrative example: you are turning away work because you lack a second vehicle that costs $35,000. If it adds $6,000 in monthly profit, and financing costs about $2,000 a month, it can make sense. Check the math with the small business loan ROI calculation. Options include working capital and equipment financing.
Frequently asked questions
What is the first step in starting a small business?
Test whether customers will pay for your offer at a price that leaves profit, before spending much money.
Do I need an LLC to start a business?
No. You can operate as a sole proprietor, but an LLC can add liability protection. Talk to an attorney or accountant.
How much money do I need to start?
It depends on the business. Add startup costs and several months of operating expenses, then build a conservative cash forecast.
Can I get a business loan as a new business?
Funders usually want operating history. ROI Funder considers businesses with 6+ months in business and $20,000+ monthly revenue.